What are RMDs?

What are RMDs?

RMDs are your required minimum distribution is the minimum amount you must withdraw from your account each year. You generally have to start taking withdrawals from your IRA, SEP IRA, SIMPLE IRA, or retirement plan account when you reach age 72 (70 ½ if you reach 70 ½ before January 1, 2020). Roth IRAs do not require withdrawals until after the death of the owner.

If you have an IRA, you will probably need to take a distribution at some point in the future. This means that according to the IRS's life expectancy estimates, you will need to withdraw a specific sum of money from your account. The government wants to make sure you're spending your IRA money for retirement plans and not just letting it sit there and increase tax-deferred, so this is why.

RMDs are meant to prevent people from using their IRAs as a means of avoiding paying taxes on their investment income. RMDs are a tool used to compel people to withdraw money from their IRAs and pay taxes on it. Your age and the value of your IRA will determine how much you must withdraw each year. You will be liable to penalties equal to 50% of the minimum distribution you should have taken out if you don't.

When must I take my RMD?

Procrastination is a major issue that contributes to people not taking their RMD, thus the IRS has established several restrictions to attempt and address this. Once you turn 72 years old, you must begin taking your first RMD. You must start taking annual distributions by December of the year following your first RMD. The usual cutoff is April 1st of the year after your 72nd birthday, but if you wait until beyond that day to take your first payout, you will have to take two distributions that year.

Can the penalty be waived?

If you have a valid excuse for not taking your RMD, the IRS might be willing to waive the 50% penalty. The IRS may forego the penalty in situations when people were unaware that they were required to take an RMD. Some people fail to meet this deadline because they believe they can postpone it till they retire. Others calculate their distribution amount incorrectly and take too little, incurring penalties.

When evaluating whether to waive the penalty, the IRS also considers unforeseeable events like natural disasters. Your employer might still allow seniors who are over 72 to make 401(k) contributions. In this scenario, you are exempt from having to withdraw any money from your account prior to retiring. This is an exception to the rule and was created to provide people who are still in the workforce extra time to increase their retirement funds.

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